Loan delinquency rate is continuing to climb

March 11, 2007|By Craig Torres, Bloomberg News

The Federal Reserve said that the delinquency rate on banks' residential real estate loans climbed last quarter to the highest level in four years.

The share of the loans on which payments were at least 30 days overdue rose to 2.11 percent, the highest since the fourth quarter of 2002, from 1.72 percent the previous three months, according to data posted on the Fed's Web site Feb. 27. The data aren't adjusted for seasonal patterns.

The deterioration in credit quality comes in a period of sustained gains in employment and incomes, a sign that weaker underwriting standards, not economic stress, may be to blame.

Fed policymakers this year have repeatedly said that mortgage losses were concentrated in subprime loans, which are designed for lower-income borrowers.

"The real issue here is whether this is a story confined to a small portion of the household sector or is this something that becomes a broader macroeconomic story?" said Brian Sack, a former Fed economist who is now a vice president at Macroeconomic Advisers LLC in Washington. "Some households are in trouble."

Subprime loan delinquencies rose to 12.56 percent in the third quarter from 11.7 percent in the prior three months, according to the Mortgage Bankers Association. That caused at least 20 lenders to go bust, scale back or sell themselves in the past five months.

Subprime mortgages are given to people with poor or limited credit records or high debt burdens and typically have rates at least 2 or 3 percentage points above safer prime loans.

They made up about a fifth of all new mortgages last year, according to the Washington-based Mortgage Bankers Association.

"Banks and non-banks have been making a lot of loans without regard for borrower ability to repay" after introductory rates adjust, said Alys Cohen, a staff attorney at the National Consumer Law Center in Washington.

Delinquency rates on a seasonally adjusted basis rose to 1.91 percent of outstanding loans at the end of 2006, the highest since the first quarter of 2003.

"The housing boom peaked about a year and a half ago, and we should expect to see a modest rise in delinquencies," said Julia Coronado, senior U.S. economist at Barclays Capital Inc., New York. "This is not alarming."

"Ultimately, it all goes back to underwriting standards," said Joel Naroff, chief economist at Commerce Bancorp Inc. in New Jersey. "As long as banks don't knee-jerk react, and start restricting credit across the board, I don't think it has a large macroeconomic impact. You won't have a major credit crunch."